Threat of youth unemployment

Pakistan faces many threats which seem at times to threaten its existence. Terrorism, religious intolerance, and sectarian violence are routinely featured in the media. But there is another threat, somewhat mundane in nature so it does not catch the public’s attention. Yet the reality is that youth unemployment may well pose a bigger risk to our future than all other threats combined.

Start with the numbers. The Pakistan Bureau of Statistics in its 2012 - 2013 Survey of Labour Statistics states that 48.67% of Pakistan’s population is below the age of 24. The same report puts the unemployment rate in the 20 to 24 year age bracket at 9.90%. For women alone this rate is 13.33%. Unfortunately these rates grossly understate reality. Unofficial estimates of unemployment among youth range widely from a low of 25% to a high of 40%.

While the situation is bad today, it will become untenable in the future. Some 100 million young people will enter the labour force over the next two decades. The problem is that there will be no jobs for them. How do we create these jobs?

Agriculture is sixty to seventy percent of our economy. But even in backward Pakistan, machines are slowly but surely replacing manual labour in the fields. Travel around the grain belts of the Punjab and you will see huge mechanical harvesters working the land. Thousands, perhaps hundreds of thousands of agricultural workers are seeing their jobs disappear as the machines move in.

So agriculture, if anything, will see a contraction of its existing workforce. The only viable option is to build industry. A single factory, depending on the level of investment, can create thousands of new jobs. The way to do this is to put in place an industrial policy which ensures the sustained and rapid development of manufacturing capacity.

As things stand this may as well be a pipe dream. Crippling shortages in power and gas and the unraveling security environment are in fact contributing to deindustrialization. Industry is losing jobs, not creating them.

But let’s assume that power and gas shortages are overcome and the security environment improves. The question then becomes: What do we need to do to build local manufacturing capacity and create the jobs we so desperately need for our young people?

The single most important aspect of any industrial policy is to create a protected market in which new industries can survive and grow. The way to do this is to fence off our local markets from imported products. This can take the shape of high customs duties on imported goods or outright import bans. Absent such market protection, industry will never flourish in Pakistan. But this kind of talk is anathema to global financial and trade organizations such as the IMF and the World Trade Organization. They will use whatever leverage they have to prevent us from doing this. It is critical to understand why they have to be resisted.

Turn to the experience curve. This is a concept used by business economists to analyze the competitive position of key players in a given industry. Simply put, it says that a company’s unit cost of producing a good declines steadily in proportion to the cumulative number of such goods produced by the company. This means, that a car manufacturer who has produced two million cars since the company started will have a lower cost per unit than another manufacturer who has produced one million cars. The company with more experience (cumulative number of cars produced) is in a stronger competitive position. So a company that is the first or earliest to enter a certain business builds up an advantage through experience that later entrants in the market find difficult or impossible to overcome.

Toyota was a much later entrant to the car business than the major American producers such as General Motors and Ford. The experience curve would suggest that Toyota should never have been able to compete with them. Yet it does and very successfully. This is because the Japanese Government, in the early stages of Japan’s industrial development effectively closed its markets to finished imported goods. This protected its local manufacturers such as Toyota from foreign competition giving them the opportunity to acquire the experience needed to compete internationally.

Japan’s industrial development consisted of two central elements. First, closing Japan’s markets to all but primary raw materials. And second, recognizing that industrial development required the active involvement of the government in developing and implementing industrial policy. This is what enabled Japan to become an industrial powerhouse.

The inexorable logic of the experience curve applies to countries just as it applies to companies. Those that have industrialized earlier have an inherent advantage over those that industrialize later. The only way to offset this advantage is through market protection.

Pakistan is in a difficult position. As a member of the WTO since 1994, we are obliged to lower or eliminate trade barriers. And as a debtor to the IMF, we are under sustained pressure to open our markets and reduce government involvement in the private sector.

So putting in place an industrial policy that will by design defy these agencies will not be easy. But it must be done. Exiting the WTO or defaulting on IMF credits will seem like a walk in the park compared to the anger and angst of five million young people who enter the workforce every year only to find that they have no chance of being employed.